Currency Exchange Rate Policies and the World Trade Organization Subsidies Agreement

May 16, 2016

Currency Exchange Rate Policies and the

World Trade Organization Subsidies Agreement

Some Members of Congress have expressed concerns that

foreign countries are “manipulating” their currencies

through their exchange rate policies. Such concerns have

focused on policies that are seen as weakening the value of

the countries’ currencies against the U.S. dollar. Some

commentators have suggested that these practices amount

to an export subsidy. They argue that although that subsidy

may benefit U.S. consumers through lower prices, it may

also harm U.S. import-competing firms and their workers.

to raise tariffs on imports of U.S. products above its bound

commitment levels.

Legislation introduced in the 114th Congress would amend

Title VII of the Tariff Act of 1930, 19 U.S.C. §§1671 et

seq., to treat an undervalued currency as an export subsidy

under U.S. trade law; describe a methodology to determine

how much the currency is undervalued (i.e., the subsidy);

and apply that calculation for the imposition of

countervailing duties (CVDs). E.g., H.R. 820; S. 433. If

enacted, such legislation could ultimately allow the U.S.

Department of Commerce (DOC) to impose CVDs on

certain injurious imports from foreign countries whose

currencies had become undervalued as a result of

government action.

Can Currency Exchange Rate Policies

Constitute a “Subsidy”?

Summary

Government or “Public Body”

A subsidy may exist not only when a government makes a

financial contribution, but also when another “public body”

of a member makes such a contribution. The Appellate

Body has held that determining whether an entity is a public

body involves a fact-specific inquiry, but that generally

such entities must possess, exercise, or be vested with

governmental authority. US—Anti-Dumping and

Countervailing Duties (China), WT/DS379/AB/R, paras.

317-318.

This In Focus analyzes whether the United States could,

consistent with World Trade Organization (WTO) subsidies

rules in the Agreement on Subsidies and Countervailing

Measures (ASCM) and the General Agreement on Tariffs

and Trade 1994 (GATT), impose CVDs on imports from a

WTO member country to offset what the U.S. determines is

an illegal subsidy conferred by that member on its domestic

industries through undervaluation of its exchange rate. This

In Focus does not examine the consistency of exchange rate

policies with other provisions of the WTO agreements.

As discussed below, it may be difficult to argue that

currency exchange rate policies constitute a countervailable

export subsidy as defined under WTO law. In particular,

such monetary and fiscal policies do not clearly fit within

ASCM provisions that define an export-contingent subsidy,

as these provisions have been interpreted in dispute

settlement cases.

The WTO’s dispute settlement process would ultimately

determine whether CVDs on imports from countries that are

manipulating their exchange rates are consistent with WTO

agreements. If the U.S. maintains CVDs on products in the

absence of a countervailable “subsidy” as defined in WTO

law, the WTO’s Dispute Settlement Body (DSB) ultimately

may authorize a complaining member to engage in trade

retaliation. See, e.g., ASCM Arts. 10, 32.1, 32.5. For

example, the DSB could authorize a complaining member

For additional background on the debate over countries’

exchange rate policies and a discussion of other

international forums for addressing concerns with these

policies, see CRS Report R43242, Current Debates over

Exchange Rates: Overview and Issues for Congress, by

Rebecca M. Nelson.

Under WTO rules, the United States cannot impose CVDs

on imports from a WTO member considered to be

manipulating its currency exchange rate unless such

practices provide a countervailable “subsidy” to that

member’s industry within the meaning of ASCM Article 1.

This article states that a subsidy exists when a government

or other “public body” makes a “financial contribution”

within the territory of a WTO member that confers a

“benefit.” This analysis assumes that the financial

contribution is made in the territory of a WTO member.

Under WTO jurisprudence, the government need not

delegate such authority explicitly to the entity in a law. If,

in fact, a government has meaningful control over an entity

and its conduct, this can serve as sufficient evidence that

the entity exercises government authority when it performs

a governmental function. However, mere “formal links”

between the government and entity, such as a government’s

stake in the entity, are not sufficient by themselves. Id.

“Financial Contribution”

Not all government measures or practices that benefit a

domestic producer or exporter constitute subsidies. The

ASCM enumerates five general categories of measures or

practices that are subsidies:

(a)(1)(i) a government practice involves a direct

transfer of funds (e.g. grants, loans, and equity

infusion), potential direct transfers of funds or

liabilities (e.g. loan guarantees);

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Currency Exchange Rate Policies and the World Trade Organization Subsidies Agreement

(ii) government revenue that is otherwise due is

foregone or not collected (e.g. fiscal incentives such

as tax credits);

(iii) a government provides goods or services other

than general infrastructure, or purchases goods;

(iv) a government makes payments to a funding

mechanism, or entrusts or directs a private body to

carry out one or more of the type of functions

illustrated in (i) to (iii) above which would normally

be vested in the government and the practice, in no

real sense, differs from practices normally followed

by governments; or

... there is any form of income or price support in

the sense of Article XVI of GATT.

None of the first four categories of financial contributions

appears to cover government exchange rate policies. For

example, category (i) includes government practices

involving direct transfers of funds. To weaken its currency,

a government might, for example, sell domestic currency in

exchange for foreign currency or assets denominated in

foreign currency in foreign exchange markets. However,

such transactions, which involve a government’s

macroeconomic policies, appear to differ from the types of

direct transfers of funds to private entities contemplated in

this category (e.g., grants, loans, and equity infusions). It is

also not clear that exchange rate policies are direct transfers

of funds to producers and exporters because these entities’

export earnings depend on demand by third parties in

foreign markets for their products.

One might argue that a category (i) “financial contribution”

exists when currency from export transactions is exchanged

for an undervalued currency. See, e.g., H.R. 820. However,

it is not clear that a member’s exchange rate policies could

be imputed to such a transaction when analyzing whether it

meets the other elements of a countervailable subsidy under

WTO law. Exchange rate policies affect the entire economy

rather than being directly targeted at exporters.

It could also be argued that exchange rate policies provide

“income ... support” to producers or exporters. WTO

adjudicators have not engaged in significant interpretation

of this phrase, but a recent panel decision suggests it should

be interpreted narrowly. Panel Report, China-GOES, ¶ 7.85,

WT/DS414/R (“[I]t is not clear that [this provision] was

intended to capture all manner of government measures that

do not otherwise constitute a financial contribution, but

may have an indirect effect on a market.”).

“Benefit” Conferred

Assuming that exchange rate policies that lead to currency

undervaluation could constitute a “financial contribution,” a

“subsidy” exists only when some “benefit” has been

conferred on a member’s exporters or producers. Here, the

analysis focuses on the advantage to the recipient of the

government financial contribution and whether it is

received “on terms more favourable than those available to

the recipient in the market.” Appellate Body Report,

Canada—Aircraft, WT/DS70/AB/R, paras. 157-158.

Commentators have noted that establishing a “benefit”

might be complicated by difficulties in linking the foreign

exchange rate policies to increased sales and higher profits

of exporters. E.g., Claus D. Zimmerman, Exchange Rate

Misalignment and International Law, 105 Am. J. Int’l L.

423, 449-451 (2011).

In addition, the member imposing CVDs might encounter

difficulty in calculating the benefit conferred. See ASCM

Art. 14. There is no universally used or accepted

methodology for determining a currency’s market value.

Several methodologies are used by the International

Monetary Fund and other organizations to make

assessments of exchange rates. However, these produce

widely different results. Any attempt to establish a CVD

rate for affected imports could potentially be challenged by

the affected country in the WTO as arbitrary.

Can Currency Exchange Rate Policies

Confer a “Prohibited” Export Subsidy?

If a WTO panel held that exchange rate policies qualified as

a “subsidy,” then a WTO member could not impose CVDs

on imports from a country that conferred such a subsidy

unless the subsidy were “specific” under the ASCM. The

ASCM defines four types of specificity: (1) enterprise; (2)

industry; (3) regional; and (4) subsidies deemed specific

because they are prohibited subsidies contingent upon

export performance or the use of domestic over imported

goods. ASCM Art. 2. If exchange rate manipulation were a

“subsidy,” it would arguably be broadly available to a wide

variety of enterprises, industries, and regions in the

subsidizing member’s territory. Thus, commentators have

focused on whether exchange rate policies could be

“specific” because they are “prohibited” export subsidies

(i.e., subsidies whose grant is at least partly contingent upon

the export of goods).

Questions have been raised about whether a subsidy

resulting from currency exchange rate policies would be “in

fact tied to actual or anticipated exportation or export

earnings.” ASCM n.4. Some have argued that such policies

may qualify even if they also grant a subsidy to firms that

do not export, citing U.S.—Tax Treatment for Foreign Sales

Corporations (Article 21.5—EC), WT/DS108/AB/RW,

paras. 119-120. However, even if this is a correct

interpretation of precedent, it may still be difficult to argue

successfully that an export-contingent subsidy exists. The

fact that a government grants a subsidy to firms that export

does not necessarily mean a sufficient “tie” between the

subsidy and anticipated exportation exists. ASCM Art. 4;

Canada—Aircraft, ¶ 171. The Appellate Body has held that

existence of an export subsidy depends partly on “whether

the granting authority imposed a condition based on export

performance in providing the subsidy.” Id. at ¶ 170. It is not

clear that exchange rate policy “subsidies” would be

contingent upon exports, as their grant appears conditioned

upon the exchange of foreign currency for undervalued

currency and not upon the export of products.

Brandon J. Murrill, Legislative Attorney

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IF10406

Currency Exchange Rate Policies and the World Trade Organization Subsidies Agreement

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